Building Your Business What Is Section 1245 Property? By Jean Murray Updated on September 26, 2022 Fact checked by Sarah Fisher Fact checked by Sarah Fisher Sarah Fisher is an associate editor at The Balance with two years of personal finance and business writing experience. She has written about personal finance for SmartAsset, and has held internships at the Consumer Financial Protection Bureau and Senator Kirsten Gillibrand's office. learn about our editorial policies In This Article View All In This Article Types of Section 1245 Property How Section 1245 Property Works Reporting Section 1245 Gains and Losses Frequently Asked Questions (FAQs) Photo: Cavan Images / Getty Images Definition Section 1245 property includes certain types of business property on which depreciation or amortization has been allowed. The profit on the sale of these assets may be taxed as ordinary income instead of as a capital gain. Personal property of a business that is movable or intangible may qualify as section 1245 property. Key Takeaways Section 1245 property is a specific type of business property that is depreciated or amortized.It includes business personal property and tangible property used in certain industries.Gains on the sale of section 1245 property are often taxed as ordinary income instead of capital gains. Types of Section 1245 Property Certain types of property are taxed under Internal Revenue Service (IRS) section 1245 rules. Section 1245 property includes property subject to depreciation or amortization. The two main types of section 1245 property are business personal property (tangible or intangible) or tangible property used in certain business activities. Tangible property is depreciated; intangible property is amortized. Business personal property: Business personal property is property that is movable and is not attached to or associated with land. Intangible personal property includes types of property with no physical presence, such as trademarks, copyrights, and patents. Tangible business property: Tangible property used in business activities of transportation, communications, electricity, gas, water, or sewage disposal services can qualify as section 1245 property. It can also include research facilities and certain types of storage facilities. Schedule 1245 property doesn’t include buildings and structural components such as windows, doors, light fixtures, and central air conditioning systems. Note Section 1245 property is not always easily identifiable. You might need the help of a licensed tax professional to figure out if section 1245 tax rules apply to you. How Section 1245 Property Works When you sell business assets (the IRS uses the term “property”), you have either a gain or loss, based on the difference between the adjusted basis of an asset and the amount you sold it for. The adjusted basis of an asset is the initial cost of the asset plus the value of any additions or improvements, or less any depreciation or casualty losses. If you sell an asset for more than the adjusted basis, you have a gain; if you sell it for less, you have a loss. Gains and losses on the sale of business property are usually taxed at the capital gains tax rate, but section 1245 property is an exception. If you sell a section 1245 asset at a gain, the government can recapture (recover) all or part of that gain from depreciation by taxing it at the ordinary income tax rate. How Section 1245 Property Is Taxed For example, if you purchase a section 1245 asset for $1,000, and the total depreciation is $200, the value of your property is $800. If you resell that asset for $900, you make $100 in profit. That $100 will be taxed at the ordinary income tax rate because it is recaptured depreciation. If you resell that asset for $1,100, you make $300 in profit. Out of the $300 you made in profit, $200 is taxed at the ordinary income tax rate because it is recaptured depreciation. The remaining $100 may be taxed as either ordinary income or capital gains. If you have held the asset for longer than a year, the remaining $100 will be taxed at the capital gains rate. If you have a loss on the sale of section 1245 property, the loss is taxed as an ordinary loss, not a capital loss. Note If you are a sole proprietor, the capital gains tax rate you are subject to will most likely range from 0% to 15%, depending on your taxable income. The ordinary income tax rate is set on a scale from 10% to 35%, depending on your taxable income. Reporting Section 1245 Gains and Losses You’ll have to first separate out gains and losses into short term (for assets held a year or less) and long term (held more than a year). Use Form 4797 Sales of Business Property to calculate the ordinary income part of the gain on section 1245 property. You may also have to report section 1245 property gains and losses, along with all other types of gains and losses, on Form 8949 Sales and Other Dispositions of Capital Assets. Then use Schedule D to calculate the total gain or loss from what you reported on Form 8949. You may also need to use Schedule D to report additional transactions not included on Form 8949. Note Keep all information about your section 1245 assets, including when and how you acquired it, cost or other basis, and all depreciation or amortization up to the date of the sale. Frequently Asked Questions (FAQs) What is the difference between section 1231 and 1245 property? Section 1231 property is real or depreciable property held longer than one year and used in a business. Profit on the sale of section 1231 property is taxed as ordinary income up to the amount of nonrecaptured section 1231 losses from the previous year. The rest, if any, is taxed as a capital gain. Section 1245 property is essentially a type of section 1231 property where there is an unrecaptured allowed or allowable depreciation or amortization deduction. All or part of the gain on this type of property will be taxed as ordinary income. Is rental property section 1250 or 1245? Section 1250 property is real property, such as land and buildings. It includes rented property and low-income rental property that meets the depreciation requirements. Section 1245 property doesn’t include buildings or rental properties. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Publication 544 Sales and Other Dispositions of Assets." Page 27. IRS. "Publication 544 Sales and Other Dispositions of Assets." Page 28. IRS. "Publication 544 Sales and Other Dispositions of Assets." Page 3. IRS. "Publication 544 Sales and Other Dispositions of Assets." Page 26. IRS. "Topic No. 409 Capital Gains and Losses." IRS. "Publication 544 Sales and Other Dispositions of Assets." Page 34. IRS. "Publication 544 Sales and Other Dispositions of Assets." Page 19. TaxAudit. “What Is the Difference Between 1245, 1231, and 1250 Properties?” IRS. "Publication 544 Sales and Other Dispositions of Assets." Pages 28-29.